Outsourcing

Definition: Outsourcing is any task, operation, job or process that could be performed by employees within an organization, but is instead contracted to a third party for a significant period of time. In addition, the functions that are performed by the third party can be performed on-site or off-site. Hiring a temporary employee while your secretary is on maternity leave is not outsourcing. So, what is outsourcing? Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers. Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel. Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes, such as benefits management. But some organizations outsource whole operations. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO). Business process outsourcing encompasses call center outsourcing, human resources outsourcing (HRO), finance and accounting outsourcing, and claims processing outsourcing. These outsourcing deals involve multi-year contracts that can run into hundreds of millions of dollars. Frequently, the people performing the work internally for the client firm are transferred and become employees for the service provider. Dominant outsourcing service providers in the information technology outsourcing and business process outsourcing fields include IBM, EDS, CSC, HP, ACS, Accenture and Capgemini.

Some nimble companies that are short on time and money, such as start-up software publishers, apply multisourcing using both internal and service provider staff in order to speed up the time to launch. They hire a multitude of outsourcing service providers to handle almost all aspects of a new project, from product design, to software coding, to testing, to localization, and even to marketing and sales. The process of outsourcing generally encompasses four stages: 1) strategic thinking, to develop the organization's philosophy about the role of outsourcing in its activities; 2) evaluation and selection, to decide on the appropriate outsourcing projects and potential locations for the work to be done and service providers to do it; 3) contract development, to work out the legal, pricing and service level agreement (SLA) terms; and 4) outsourcing management or governance, to refine the ongoing working relationship between the client and outsourcing service providers. In all cases, outsourcing success depends on three factors: executive-level support in the client organization for the outsourcing mission;ample communication to affected employees; and the client's ability to manage its service providers. The outsourcing professionals in charge of the work on both the client and provider sides need a combination of skills in such areas as negotiation, communication, project management, the ability to understand the terms and conditions of the contracts and service level agreements (SLAs), and, above all, the willingness to be flexible as business needs change. The challenges of outsourcing become especially acute when the work is being done in a different country (offshored), since that involves language, cultural and time zone differences. In business, outsourcing is the contracting out of a business process to a third-party. The term "outsourcing" became popular in the United States near the turn of the 21st century. Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always.[1] Outsourcing is also used to describe the practice of handing over control of public services to for-profit corporations. Outsourcing includes both foreign and domestic contracting, and sometimes includes off shoring or relocating a business function to another country. Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring.The opposite of outsourcing is called insourcing, which entails bringing processes handled by third-party firms in-house, and is sometimes

accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process. Reasons for outsourcing Companies outsource to avoid certain types of costs. They outsource the non core activities. Among the reasons companies elect to outsource include the avoidance of regulations, high taxes, high energy costs, and costs associated with defined benefits in labor-union contracts and taxes for government-mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short-run costs, executive management sees the opportunity for short-run profits, while the income growth of the consumer base is strained. This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers. Lower regulatory costs are an addition to companies saving money when outsourcing. On comparative costs, a U.S. employer typically incurs higher defined benefit costs associated with taxes to account for social security, Medicare, safety protection (OSHA regulations) and FICA taxes etc. than in other countries. Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business. Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction. Import marketers may make short-run profits from cheaper overseas labor and currency mainly in wealth-consuming sectors at the long-run expense of an economy's wealth-producing sectors, thus straining the home country's tax base, income growth, and increasing the debt burden. When companies off shore products and services, those jobs may leave the home country for foreign countries, at the expense of the wealth-producing sectors. Outsourcing may increase the risk of leakage and reduce confidentiality, as well as introduce additional privacy and security concerns. The most commonly outsourced streams of business include:

IT outsourcing Legal outsourcing Content Development Web Design and Maintenance Recruitment Logistics

Manufacturing Technical/Customer Support

Advantages and Disadvantages of Outsourcing Outsourcing most commonly known as offshoring has pros and cons to it. Most of the time, the advantages of outsourcing overshadow the disadvantages of outsourcing. The Advantages of Outsourcing

Swiftness and Expertise: Most of the times tasks are outsourced to vendors who specialize in their field. The outsourced vendors also have specific equipment and technical expertise, most of the times better than the ones at the outsourcing organization. Effectively the tasks can be completed faster and with better quality output Concentrating on core process rather than the supporting ones: Outsourcing the supporting processes gives the organization more time to strengthen their core business process. Risk-sharing: one of the most crucial factors determining the outcome of a campaign is risk-analysis. Outsourcing certain components of your business process helps the organization to shift certain responsibilities to the outsourced vendor. Since the outsourced vendor is a specialist, they plan your risk-mitigating factors better. Reduced Operational and Recruitment costs: Outsourcing eludes the need to hire individuals in-house; hence recruitment and operational costs can be minimized to a great extent. This is one of the prime advantages of offshore outsourcing.

The Disadvantages of Outsourcing

Risk of exposing confidential data: When an organization outsources HR, Payroll and Recruitment services, it involves a risk if exposing confidential company information to a third-party. Synchronizing the deliverables: In case you do not choose a right partner for outsourcing, some of the common problem areas include stretched delivery time frames, sub-standard quality output and inappropriate categorization of responsibilities. At times it is easier to regulate these factors inside an organization rather than with an outsourced partner.

Hidden costs: Although outsourcing most of the times is cost-effective at times the hidden costs involved in signing a contract while signing a contract across international boundaries may pose a serious threat. Lack of customer focus: An outsourced vendor may be catering to the expertise-needs of multiple organizations at a time. In such situations vendors may lack complete focus on your organizations tasks.

With all these pros and cons of outsourcing to be considered before actually approaching a service provider, it is always advisable to specifically determine the importance of the tasks which are to be outsourced. It is always beneficial for an organization to consider the advantages and disadvantages of offshoring before actually outsourcing it. What are the pros and cons of outsourcing? Outsourcing is often undertaken to provide enterprises a competitive advantage by delegating business process to external agencies and realizing the benefits of low labor, better quality and improved innovation. While this provides a good picture of the fair side of the coin, most managers however need to grope with the possible shortcoming of the process and the corresponding impact on the companys core processes. To best analyze the opportunities presented it is essential to reflect upon the advantages vis--vis the disadvantages of outsourcing. The pros of outsourcing The pros of outsourcing often positively reflected by enterprises across industries include:

Better revenue realization and enhanced returns on investment Lower labor cost and increased realization of economics of scale Tapping in to a knowledge base for better innovation Frees management time, enabling companies to focus on core competencies while not being concerned about outsourced routine activities Increases speed and the quality of delivery of outsourced activities Reduces cash outflow and optimizes resource utilization

The cons of outsourcing Often weighed with the advantages before any decision on outsourcing is undertaken, the following represents some of the possible disadvantages often dwelled upon:

Possible loss of control over a companys business processes Problems related to quality and turnaround time Sluggish response times coupled with slow issue resolutions Shortcomings in performance vis--vis expectations Lower than expected realization of benefits and results Issues pertaining to lingual accent variation An irate customer base coupled with enraged employee unions

OUTSOURCING MYTHS

1. Myth: Outsourcing will solve all your problems.

The first outsourcing myth is the biggest. If you have problems in your business, outsourcing does not magically make them go away. For example, I had a client that was considering outsourcing customer service because their employees were not able to keep up with the call volume. Instead of hiring additional employees they were considering outsourcing. Upon analyzing the call logs, it was discovered that a majority of calls pertained to the software interface for the product (it was confusing and poorly designed). The problem was a poorly designed interface that was causing a large amount of support calls. Outsourcing would not have solved that problem. It would just move the problem from one place to another.

2. Myth: Outsourcing companies will do it better than you can.

There is a perception that any company that performs outsourcing will do it better than you because they specialize in it. True, they are motivated to deliver quality service. But, after the contract is signed (i.e. their price is fixed for the next 2 to 5 years) their motivation is to reduce costs in order to maximize profits. Their shareholders are not your shareholders. It is possible that the extra money you spend on that back-office service is what gives you the edge over your competitors.

3. Myth: Outsourcing will save you money. The other perception is that any outsourcing company can also do it cheaper than you. A majority of this depends upon how well your company negotiated the contract. If the contract contains limitations or maximum levels, penalties may start to be assessed. Suddenly, that fixed price contract turns into an outrageous financial obligation of the company.